Everybody wants to be the hero… Everybody wants to “call the bottom.”
The thing is, a market doesn’t bottom until everyone gives up.
I hope you can see, these two things can’t work together.[ad#Google Adsense 336×280-IA]So when you know that EVERYONE is trying to call the bottom, you have to take the opposite side of that trade… You have to realize that there’s nobody left to buy, so chances are, prices will go down as these buyers start to give up.
We saw this in action in oil and energy companies at the beginning of this year…
Oil prices had fallen from over $100 a barrel to around $35 a barrel at the start of this year… so investors were betting heavily that oil and energy stocks had to come back.
Investors wanted to be the hero… they wanted to call the bottom.
In my True Wealth Systems letter, we did the opposite… we knew, in this case, that the better trade was to “kick ’em while they were down,” as opposed to betting on a recovery.
We made a trade against oil and energy stocks – for a two-month time frame. The trade is almost over – and we’re up 17% so far on it.
Let me share with you what we wrote in our January issue of True Wealth Systems, so you can understand our way of thinking and use it yourself…
This month, we’re shorting the “worst of the worst” in the energy sector – oil and gas exploration and production (E&P) stocks. [Oil stocks] have been crashing for more than a year and a half. And based on one simple criterion, they could be on the verge of their next major leg down.
Investors keep pouring money into these stocks. Specifically, investors are pouring money into oil and gas E&P companies. We can see this by looking at the multibillion-dollar SPDR S&P Oil & Gas Exploration & Production Fund (XOP).
You see, XOP creates and liquidates shares based on demand. If folks are buying into the sector, XOP will create new shares to meet that demand. And since mid-2014, investors have consistently moved their money into XOP. We saw a massive spike in its share count in December.
But as I told my subscribers, big inflows into XOP isn’t a great sign for the share price…
As you can see, on average, these massive inflows led to 22% losses in XOP over the next two months.
The oil and gas E&P sector is in the middle of a major crash. Yet investors are still having a love fest with this group of stocks. Two weeks ago, XOP saw a massive inflow of new dollars. And our computers tell us that we need to bet against XOP after such a rare event. History says that profits of 20%-plus are likely in just the next two months.
We got it exactly right… It has been nearly two months… and oil stocks have continued to get crushed. As I said, we’re up 17% on our trade so far.
The crazy part is, investors STILL are not giving up!!!
On February 16, 2016, the number of shares outstanding hit a record. This tells me that investors are still trying to be heroes… They’re still trying to time the bottom perfectly.
Remember, the bottom doesn’t happen until everyone gives up.
Unfortunately for these investors, they don’t realize that nobody has given up. They don’t realize that everyone loves energy stocks – still!
So we are still correct in our “kicking ’em while they’re down” trade…
Even though we have made a lot of money in a short-term trade in an index exchange-traded fund (ETF), I believe we’ll close out this trade for even bigger profits.
Never forget today’s lesson…
Everyone wants to be the hero and call the bottom. But the bottom doesn’t happen until everyone gives up.
Investors haven’t given up yet on oil and energy stocks. So the bottom isn’t here yet…
Source: Daily Wealth